Electric performance in 2017 powers tempered optimism · 2020-04-22 · Robotics/drones 9. Security...

Semiconductors: Can the surge continue?Electric performance in 2017 powers tempered optimism

2018 KPMG Global Semiconductor Industry Outlook

kpmg.com/semiconductors

https://home.kpmg.com/us/en/home.html

http://kpmg.com/semiconductors

Lincoln Clark is the leader of the firm’s Global Semiconductor practice and a member of KPMG in the United States’ Technology, Media & Telecommunications practice. He has more than 30 years of

experience providing auditing and accounting services, including as lead partner for a significant number of FORTUNE 500 companies. Lincoln has extensive experience working with semiconductor companies on IPOs, debt financings, acquisitions, and equity financing.

Tim Zanni is the Global and U.S. Technology leader for KPMG, responsible for leading the growth and success of the firm’s global technology industry practice. He has more than 35 years of global

experience as a business leader and technology adviser. Tim is a graduate of KPMG’s Chairman’s 25 Leadership Program and has served as a coach for KPMG’s Lead Partner Academy. He is the current host and former moderator of KPMG’s Audit Committee Roundtable Series and current moderator of KPMG’s Audit Committee Chair Peer Exchange.

Scott Jones is a principal in the firm’s Global Semiconductor practice and member of KPMG in the United States’ Technology, Media & Telecommunications practice.He has more than 15 years

of experience as a program manager in the semiconductor industry, equity analyst covering the semiconductor sector, and consultant serving technology companies. Scott has delivered performance improvement services in areas such as R&D portfolio management, financial modeling of advanced technologies, M&A strategy, post-merger integration, and operating model transformation.

Chris Gentle is a partner in the firm’s Global Semiconductor practice and a member of KPMG in the United States’ Technology, Media & Telecommunications practice. He is also the Technology

leader for the Silicon Valley practice. He has over 20 years of experience providing financial statement audit and M&A financial due diligence services to public and private companies in the semiconductor, electronics, and software sectors.

About the authors

© 2018 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. NDPPS 742185

After two years of relatively stagnant sales, the industry cycle ramped up again in 2017 in unexpectedly historic fashion. We’ll see what this means for 2018 and beyond. No doubt the future is bright with a dizzying array of new technologies being built on the backbone of the semiconductor industry. Our challenge will be to deliver the products and innovation to make them a reality. Yet no matter what’s going on in the industry (change is, after all, constant), KPMG provides insightful perspective and advice to help guide us along the way. And for that I thank them.

— Jodi Shelton, President, GSA (Global Semiconductor Alliance)

“

”

2 Foreword

3 Highlights

4 Detailed findings

9 Chip security demands attention

10 Strategic priorities

14 Opportunities

17 Challenges

18 Summary

18 Next steps

20 How KPMG can help

20 About the research

Contents

KPMG Global Semiconductor Outlook | 1© 2018 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. NDPPS 742185

The year 2017 surprised everyone. It was an exceptional one for the semiconductor industry—more than anyone expected. High-voltage revenue gains among the biggest semiconductor players led to record-breaking industry-wide performance.

How will semiconductor companies follow such remarkable performance in 2018? How can semiconductor executives flip the right switches within their organizations to turn an unexpected spike into a prolonged surge of steady, upward growth?

For KPMG’s annual global semiconductor outlook, we surveyed executive-level insiders about their perspectives and expectations following this banner year. We asked them about what sectors, products, and geographies will drive demand; what forces will impact their strategies; and what parts of their internal businesses they will invest in or transform.

We found that while most semiconductor executives recognize it will be nearly impossible to sustain such massive growth over the long-term—that yes, 2017 was an anomaly—optimism exists about their prospects for 2018. Although they recognize the industry may be due for a correction, most still predict significant growth ahead.

The majority of semiconductor leaders said they expect their companies—and the industry as a whole—to increase revenue, largely driven by diversification into revolutionary new technology segments, such as artificial intelligence (AI), the internet of things (IoT), and autonomous vehicles. Most executives expect profitability to increase alongside revenue, as companies obtain revenue from new markets and rationalize costs in research and development (R&D) processes using cutting-edge techniques. Companies also plan to increase investment in their workforce, equipment, and R&D next year.

Leveraging findings from our survey data and insightful analysis from KPMG’s semiconductor practice leaders, this report sheds light on noteworthy industry trends, emerging issues to watch out for, and key areas of opportunity for global semiconductor companies.

Lincoln Clark

Partner in charge, Global Semiconductor practice, KPMG LLP (U.S.)

Foreword

Tim Zanni

Global and U.S. Chair, Technology, Media & Telecommunications, KPMG LLP (U.S.)

2 | KPMG Global Semiconductor Outlook © 2018 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. NDPPS 742185

Highlights Financial and investment indicators all increased YoY. Percent of respondents predicting an increase next year:

Top sectors driving growth opportunities in 2018

Top strategic priorities in the next three years

Research and development (R&D) snapshot

Top industry issues in the next three years

Applications driving company revenue in the next year

57% Industry profitability

63% Company revenue

58% Company capital spending

50% Company R&D spending

43% Company workforce

1. Wireless communications

2. Internet of Things

3. Wireline communications

4. Consumer electronics

5. Industrial

6. Automotive

7. Cloud computing

8. Robotics/drones

9. Security

10. Artificial intelligence

1. Diversification

2. Mergers and acquisitions/joint ventures

3. Talent management

4. Implementing disruptive technology

5. Stronger marketing and communications

Only 49% say their R&D spending is aligned with market opportunities.

One-third say over 10% of R&D spending is on failed products.

Methodologies being used to improve R&D efficiency

1. Zero-based budgeting

2. Data & Analytics (D&A)

3. Modular designs

4. Agile

1. ASP erosion

2. Diverse customer demands

3. High cost of equipment

4. Moore’s law/scaling

5. Production capacity constraints

6. Cross-border regulation

Source: KPMG Global Semiconductor Survey 2017

Sensors/MEMS

1Microprocessors

2Memory

3


What is your estimate for the change in the annual operating profitability of the global semiconductor industry over the next year?

Detailed findings

What is your estimate for the change in the annual operating profitability of the global semiconductor industry over the next year? (by revenue)

Decrease

No change

Increase

Decrease

No change

Increase

Decrease

No change

Increase

55%

27%

18%

$1 to4.99B

$750-999M $5B+

68%

32%

54%26%

21%


57%27%

16%

Increase

Decrease

No change

ExpectationsExpect gains in revenue and operating profitability

Fifty-seven percent of semiconductor executives expect annual operating profitability of the industry to increase over the next year, up from fifty-one percent in 2017. Unlike previous years, smaller companies (under $5B) are generally more confident than larger companies. Smaller companies expect to be faster at wholesale innovation and going-to-market with chips that enable emerging applications for self-driving cars, connected devices, smart cities, and more.

Respondents are more optimistic than last year about their company’s revenue growth, with thirty-seven percent expecting one-to-five percent revenue growth (compared to thirty percent last year) and twenty-six percent expecting even higher percentages (the same as last year). Among those who do expect a revenue increase next year, the average predicted increase is seven percent. While respondents overall do not expect revenue growth to match 2017 actuals, the findings show broad-based optimism that the length of the current upcycle is showing few signs of reversing in the next three years.

Business investment up

Our survey indicates semiconductor companies will continue to spend on capital equipment at historically high levels. The number of respondents who expect an increase in capital spending has increased by thirteen percentage points, the biggest increase of all the financial and investment factors we ask about in the survey. Among the respondents, smaller companies are especially bullish. Key drivers of expectations for increased investment in equipment include demand for memory capabilities in smartphones and cloud platforms.

More respondents than last year (fifty percent compared to forty-one percent) plan to increase R&D spending in their own companies in 2018. As revenue grows, R&D spending is also likely to grow (at least in terms of absolute dollars, if not overall percentage). If companies do not increase R&D spending, they may be unable to update and replace mature products, diversity product portfolios, or feed cutting-edge markets, like the newest smartphone models, AI technologies, and connected devices.

Finally, forty-three percent of respondents expect their company’s global semiconductor workforce to increase in the next fiscal year, up six percentage points from our 2017 survey. Companies will need to add headcount to support their ramp up of engineering and design activities.

Source: KPMG Global Semiconductor Survey 2017 Increase No change Decrease


The responses to every one of these questions is more optimistic than last year’s survey. Yet given the historic performance in 2017, we interpret these responses as ‘tempered optimism.’ Nobody is expecting a repeat of 2017, but 2018 should be a successful year in its own right.

— Lincoln Clark Partner in charge, Global Semiconductor practice, KPMG LLP (U.S.)

“

”

What is your outlook for your company’s semiconductor revenue growth in the next fiscal year?

Detailed findings

What is your outlook for semiconductor-related capital spending by your company (both equipment and software) for the next fiscal year compared with your company’s current year spending?

58%

35%

8%

Increase

Decrease

No change

63%

33%

3%

Increase

Decrease

No change


What is your expectation for the change in semiconductor R&D spending by your company for the next fiscal year over the current year?

During the next fiscal year do you expect your company’s global semiconductor workforce to increase or decrease?

50%43%

7%

Increase

Decrease

No change

43%

46%

12%

Increase

Decrease

No change


Semiconductor Industry Confidence Index

It is worth noting that despite the bump, our confidence index still lies in the 40s—a seemingly unexpected finding after such a tremendous 2017 for the industry. We think this figure reflects tempered expectations after what nearly any expert in any industry would categorize as unsustainable 2017 performance. Indeed, the laws of supply and demand mean the price of memory—the sector that grew the fastest in 20171—will eventually have to drop. Respondents may also be concerned that unsustainable levels of capital spending—capital overspending—will cause an immediate contraction when there is a softening in the revenue cycle, spurring excess capacity and marking the beginning of the sort of boom or bust cycle the industry has experienced in the past.

In addition, the strength of the index score in prior years may have been driven by confidence in established technologies like personal computers (PCs). Today, revolutionary technologies such as AI and IoT, are increasingly driving the industry, and there are still many unknowns about how those emerging innovations will play out over time.

Finally, confidence may be a factor of scale. After all, not everyone participated equally in the 2017 industry expansion. If you look closely at where semiconductor industry revenue growth was concentrated in 2017, it was really driven by a handful of the largest memory and logic companies. These companies have benefited disproportionately in current trends and have a better outlook for the future as far as being able to diversify. Meanwhile, smaller companies may have a more tempered outlook for 2018, moderating the overall confidence index.

1 Memory Devices Boost Chip Forecast… Again (EPSNews, October 13, 2017)

43KPMG calculates the Semiconductor Industry Confidence Index based on survey respondents’ single year outlooks for revenue growth, operating profitability, workforce, and capital and R&D spending. This year, we found a more positive outlook for the global semiconductor industry. The index score increased after two years of decline.

In addition, the short-term one-year) and long-term (three-year) expectations across the key measures that feed the index—expectations for revenue, profitability, and business investment—are all trending positively, with three-year outlooks rosier than one-year outlooks in almost all cases. The fact that the individual pillars of the index are all trending upward indicates that while industry insiders do expect slower revenue growth compared to 2017, they still see continued growth ahead.

Confidence growing


Detailed findings (continued)


2 How Nvidia Surprised AI Experts Twice this Week (FORTUNE.com, December 8, 2017)

62%27%

6%5%

Expansion

Contraction

No longer cyclical

Inflection

Measuring by region, we found that executives in China are generally more bullish across the investment categories that feed the confidence index: capital spending, workforce spending, and R&D spending. This makes sense given that China—one of the world’s largest consumers of semiconductors thanks to its booming telecommunications and electronics supplier businesses3—needs to develop or acquire intellectual property to achieve its goals of becoming a global semiconductor leader.4 To catch up to the competitors and remain on track with the Made in China 2025 program, China will need to invest heavily to buy up smaller players, build factories, and staff engineers and designers. Early support from China’s National IC Investment Fund (or Big Fund) largely targeted manufacturers and M&A initiatives, while going forward it will focus much of the $30 billion in its next capital raise on three sectors: memory, compound semiconductors, and IC design applied to IoT, 5G, artificial intelligence, and smart vehicles.5

China still pursuing long-term semiconductor leadership

3 Chips on their shoulders (The Economist, January 23, 2016)4 China poses a threat to US dominance in semiconductor

industry (South China Morning Post, May 12, 2017)5 China raising $30 billion for Big Fund’s second phase (EENews

Europe, December 5, 2017)

New industry wave

Are we entering a “new wave” semiconductor industry? The significant majority of executives (62%) think we are in an expansion stage of the industry cycle in 2018, and more respondents than last year think we are in an early expansion stage, perhaps of a multi-year expansion. This finding reinforces the view that the industry is still in a strong upcycle and may reflect the fact that semiconductor leaders are taking a future-oriented approach and considering new end markets beyond the PC, such as AI, IoT, and autonomous vehicles. In addition, despite its historic year, memory companies likely do not see any coming reduction in sales in the sectors they are feeding, given booming demand for smartphones, data centers, and autonomous vehicle technologies.

It is also possible that the convergence of different semiconductor end markets, such as software, technology, and automotive, is driving an overall industry expansion. Even semiconductor business units inside the largest platform technology powerhouses may ultimately become bigger players than some stand-alone chip manufacturers. Analysts also predict that sales of semiconductor materials specifically for AI programs, like those inside autonomous vehicles, will increase more than 60 times over within five years, surging from $500 million last year to $30 billion.2

What stage of the industry cycle best describes 2018?


46%

30%

13%

12%

Willcontinue

Has already ended

Will not apply at nodes <7nm

Will not apply atnodes <16/14nm

Opinions remain mixed regarding the outlook for Moore’s law, the theory that the number of transistors that fit on a microchip will double approximately every two years, enabling chips to get smaller and faster over time. Consistent with last year’s survey, almost half (forty-six percent) of respondents believe Moore’s law will continue. Our view is that it will have the most applicability for chips over 10 nanometer; for smaller chips, the benefits of scale will disappear and its sole purpose will be to drive speed of performance, not cost savings.

Regardless of how long Moore’s law still applies, to keep up the rapid pace of innovation customers have come to expect, it is clear semiconductor companies will need to ramp up R&D—especially companies that are prioritizing AI as a key revenue driver. Our respondents say AI is the biggest at-risk technology if Moore’s law ends, given the slowing of computing power growth that would accompany its demise.

The evolution of technologies that demand semiconductors, for example IoT, automotive, and artificial intelligence, is still on the lower end of the hockey stick. This potential is driving the sentiment that the semiconductor industry still has a ways to go in the current expansion cycle.

— Chris Gentle Partner, Global Semiconductor practice, KPMG LLP (U.S.)

Which of the following best describes your perspective on the outlook for Moore’s law?

“

”



Cyber threats shift as fast as the winds and strike as hard as a thunderbolt. Never was this clearer than the early weeks of 2018, when the semiconductor industry was bombarded with news of major security problems in certain hardware.

In early 2018, it became public that researchers last year discovered a major security flaw in certain chips, the processors inside almost all PCs, tablets, smartphones, and servers—components generally thought to be secure. Analysts soon showed that the bug existed in processors built by more than one company.

The vulnerabilities could allow cyber attackers to bypass current security protocols and read data stored in memory, including sensitive personal and business information.6 Programmers quickly demonstrated how such a cyber attack could work, succeeding at accessing machine memory to steal protected passwords.7

As tech giants scrambled to apply software patches to their data center infrastructure, a new issue arose: the planned fix slowed down the performance of impacted computing devices.8

How should the industry respond?

Fortunately, cyber security was a strategic priority for semiconductor executives even before the latest firestorm of chip security holes were discovered. “Minimizing cyber security risk” rose eight spots between KPMG’s 2016 and 2017 surveys, from #17 up to #9. Since the latest survey was conducted in October 2017—before the recent chip vulnerabilities became public—the increasing priority placed on cyber security initiatives was likely as a response to the proliferation of chip-using, connected IoT devices, automobiles, and data centers.

Minimizing cyber security risk rose eight spots between KPMG’s 2016 and 2017 surveys, from #17 up to #9.

2016 2017

#9

#17

6 All About That Big Chip Security Weakness: QuickTake Q&A (Bloomberg Technology, January 3, 2018)7 Understanding Those Alarming Computer Chip Security Holes: ‘Meltdown’ and ‘Spectre’ (FORTUNE, January 4, 2018)8 Intel Says Major Security Bug Also Affects Competitors ARM and AMD (FORTUNE, January 3, 2018).


Of course, should we re-survey our audience today, we expect cyber security to rank significantly higher on semiconductor executives’ agendas. We urge semiconductor companies to confront the reality that chips are vulnerable. Hardware can be breached, and will have a waterfall impact as it spreads outward to devices in the technology ecosystem.

Hardware-based security starts by integrating security at the transistor level. As such, semiconductor companies will need to build cyber security in from the beginning by including it as a core element of the chip product design stage.

Finally, semiconductor companies will need to constantly reassess both security vulnerabilities and defenses, as cyber threats are always evolving and becoming more sophisticated. January 2018 proved that.

Chip security demands attention


0 10 20 30 40 50

2016

2017

Responding to short-termism/influence of activist shareholders

Managing partners/alliances

Diversity/Inclusion

Ensuring KPIs arefit and accurate

Limiting brand risk inage of transparency

Articulating vision/culture/purpose

Responding toregulatory change

Stronger client focus

Becoming more data-driven

Fostering innovation

Geographic expansion

Minimizing cyber security risk

Greater speed-to-market

Digitization of business

Improving relevance ofreporting to investors

Stronger marketing,branding and communications

Implementing disruptivetechnology

Talent development/management

Acquisition, mergeror joint venture

Diveresifying into anew business area

37%46%

29%31%

25%31%

24%10%

19%14%

14%12%

13%14%

12%24%

11%5%

9%9%

9%10%

8%5%

7%8%

7%3%

5%7%

5%8%

2%1%

3%12%

3%10%

6%23%

What are the top three strategic priorities for your organization over the next three years?

2017 2016

Strategic priorities Strategic priorities splinter

Given the rapid pace of technological change in today’s hyper connected and digitized world, it is not shocking that diversifying into a new business area is again cited as the top strategic priority for semiconductor executives over the next three years. Demand for more and more powerful chips continues to increase outside of traditional end markets.

But it is significant that responses to this question are more mixed this year, indicating the numerous opportunities available to the semiconductor business. Implementing disruptive technology made a particularly large jump as semiconductor players seek to transform R&D and operations to get to market more quickly and in more areas and to operate more nimbly.

While product diversification is the top strategic priority, respondents (to a different question) also name “expansion of product offerings and increased differentiation” as the biggest obstacle in achieving an optimized supply chain. It’s important to remember that growth outside of a company’s core competency in order to increase revenue can present new challenges in other parts of the business.

Talent management also remains high on the list of strategic priorities, holding the number three spot. A number of external trends are keeping talent development in the spotlight. For one, U.S immigration reform may spark a war for talent in the U.S., requiring companies to manage their workforce more closely. Second, as semiconductor companies engage in mergers and acquisitions, they risk losing their people and Intellectual Property (IP) unless they take smart steps to protect both. Another growing concern is the tech giants luring away semiconductor talent to develop their own in-house silicon capabilities. Finally, as semiconductor companies embed AI in the enterprise, they must be more sensitive than ever to its impacts on jobs and human capital.

Multiple responses allowed



9 Source: 2017 Global CEO Outlook, KPMG International10 Broadcom plans $100bn unsolicited bid for Qualcomm (Financial Times, November 3, 2017)

Strategic priorities It was very surprising that articulating vision/culture/purpose and diversity/inclusion declined so much in the strategic priority rankings this year. Across all industries, and particularly in technology, culture and diversity issues assumed the spotlight and greater importance in 2017. We expect this will continue for the foreseeable future. In KPMG’s 2017 Global CEO Outlook, the number of CEOs who cited reputational and brand risk as a top concern rose dramatically. In 2017, this was the third most important risk for CEOs (out of 16 in total). In 2016, it did not even break into the top 10.9 Every company now operates in a fishbowl and bad actors can swiftly cause reputational and financial harm. All companies should reinforce an environment of integrity and acceptance with their employees and not take it for granted.

Deal market is the real deal

M&A is often a key mechanism used to diversify businesses. Second on the list of top strategic priorities is completing an acquisition, merger, or joint venture.

Many semiconductor leaders still see deals as integral to near-term growth. Mergers, acquisitions, and joint ventures can help chipmakers stay ahead of industry change as the technologies that rely on semiconductors evolve and emerge at blistering speed. In fact, half of respondents believe the valuation of semiconductor deals will still increase (recognizing that we conducted our survey before Broadcom’s unsolicited takeover bid for rival chipmaker Qualcomm, a

Even though semiconductors are the building blocks and enable most modern technology, executives realize that even they can be disrupted. No industry is immune. Technology convergence and the fact that innovation can come from all corners is making semiconductor leaders even more proactive and forward-thinking.

— Tim Zanni Global and U.S. Chair, Technology, Media & Telecommunications, KPMG LLP (U.S.)

“

”

10%Decrease

What is your prediction for the aggregate valuation of semiconductor M&A deals in 2018 compared to 2017?


39%No change

51%Increase

potentially transformative deal which will create a company of unprecedented scale in the industry).10

Several factors are driving M&A activity, led by revenue growth. We expect the top companies in the industry to have a lot of cash on hand, and this may be particularly so for U.S. companies following recent tax reform. Leading semiconductor firms and other cash-laden buyers may make a push to acquire adjacent technologies.


Strategic priorities (continued)

68%

27%

1%

5%

1% to 10%

21% to 30%

More than 30%

11% to 20%

In the last three years, what percentage of your R&D spending has been allocated to programs that never made it to market?

37%

49%

14%

Inefficiently or very inefficiently

Somewhat efficiently

Efficiently or very efficiently

How efficiently is your R&D spending aligned with market opportunities?

Reimagining R&D

As we mentioned earlier, fifty percent of survey respondents plan to increase R&D spending next year to sustain the breakneck pace of innovation that has driven the industry for the past 50 years. But it’s how they do it that truly matters. Our survey results show that in fifty-one percent of companies, there is room for improvement in aligning R&D spending to market opportunities. In addition, one-third of companies waste more than ten percent of their R&D spending, with some companies wasting more than twenty percent. We always expect some innovation dollars in such a fast-moving and competitive industry to never to make it to market, but especially high failure rates are difficult to swallow.

Many semiconductor companies are implementing data and analytics and Agile methodologies to improve the R&D and product development process efficiency, enabling them to go to market with more profitable products, capture more market share, and earn more revenue. More than half (fifty-four percent) of respondents are using data and analytics in R&D and forty-five percent are incorporating Agile development, a technique more often seen in the software space, into hardware product development efforts. Other popular techniques used to improve R&D efficiency are zero-based budgeting (ZBB) and modular designs. We also found that once AI is embedded into the R&D function over the next three years, 39% of respondents said that R&D headcount will increase. These increased innovative resources will need to be guided by an efficient R&D process.



Quote from Lincoln Clark TK“ ”

Creating next-generation R&D

None of the above

Other

Agile development-use of Scrums

Increase in leveragingmore modular designs

Data & analytics

Zero based budgeting portfoliomanagement & resource allocation 55%

54%

49%

45%

2%

1%

What methodologies are your R&D organizations leveraging to improve R&D efficiency?

With semiconductor R&D costs rising, there is no time to waste in evolving the R&D process. Incorporating D&A and Agile methodologies into the R&D process can yield better return on investment (ROI), bring focus to future markets, and become a competitive advantage. We recommend four immediate actions:

1 Assess your current product development methodologies and your data sources and uses

2 Determine the essential data points within the product development process

3 Build an adaptable platform for data analysis

4 Establish a baseline of performance. Read our complete insights in Evolving the D&A of semiconductor R&D.11

11 Evolving the D&A of semiconductor R&D (KPMG International, 2018)

Multiple responses allowed Source: KPMG Global Semiconductor Survey 2017


Even though memory was the engine that drove 2017 revenue, respondents ranked it third in terms of growth opportunity for 2018. This could be due to anticipated supply catching up with demand during the year.

— Scott Jones Principal, Global Semiconductor practice, KPMG LLP (U.S.)

“

”

Sensors/MEMS, microprocessors in the spotlight

If you had $500 million to invest in the semiconductor industry, what sectors would you invest in? The clear leader among our respondents is microprocessors. These products remain critical pieces of common electronic, automotive, computing, consumer, and media devices and are only poised for further growth as the AI and the IoT markets move beyond the early stages of development. Indeed, current trends in venture capital show a significant amount of start-up funding going into chipsets to support AI, neural networks, IoT, and autonomous vehicles.12 Semiconductor companies are betting heavily on the AI revolution and the connected age, anticipating the role their industry will play in creating chips and producing enough memory and computing power to support both. Memory, which is driving so much revenue growth right now, actually ranks lowest. Executives may believe the memory segment has been bled dry, given the level of investment that has already gone into it.

Similarly, sensors/MEMS (like last year) are expected to provide the highest growth opportunity in 2018 for the industry, followed by microprocessors. But we also see more bunching of responses this year, indicating increasing opportunities across a breadth of other sectors, including memory, optoelectronics, and analog/RF/mixed signal.

33%

24%

22%

9%

11%Microprocessors optimized for AI and neural networks

New packagingtechnology

Wide band gap/compound semiconductors

Memory

Sensors/MEMS optimized for IoT and autonomous vehicles

If you were a financier and had $500M to invest in the semiconductor industry, what segment/technology would you invest in?

12 Back To The Future: Chip Makers Are Putting The Silicon Back In Silicon Valley (Forbes.com, August 3, 2017)


Opportunities


Chips wanted for wider variety of applications

You can’t leave home without it: Anyone glued to their smartphone screen for hours on end will not be surprised that the most important application market driving semiconductor revenue is wireless communications, including smartphones and other mobile devices, as was the case last year. However, again, our findings show the end uses of semiconductor products becoming

How would you rate each of the following in terms of growth opportunity in 2018 for the semiconductor industry?

1

Sensors/

MEMS

2

Micro-

processors

3

Memory

4

Opto-

electronics

5

Analog/RF/

Mixed Signals

6

Discretes

7

Other logic


Opportunities

more diverse. There is a more even distribution in target application markets this year. Wireless communications, IoT, wireline communications, consumer electronics, industrial, automotive, cloud computing, robotics/drones, security, and AI and all ranked as “very important application markets” that will drive revenue over the next year. AI, it is worth noting, was barely even on the radar last year. IoT could produce results based on sheer volume. Also, cloud computing made a huge jump as consumers continue to demand more

storage space for photos, e-mails, music, and other personal data. Clearly, there are no longer just a few end markets driving the industry; now there are ten or eleven that are really important. More flexible chips and systems are required to cater to a greater number of technology applications; so as emerging technology starts to go mainstream, semiconductor companies will need to become more efficient in R&D.


Global markets

The United States and China, the traditional semiconductor powerhouses that dominated sales for the greater part of the decade, will maintain their position as the most important geographic areas for semiconductor revenue growth three years from now, according to our survey. But both countries are considered less important than they were one year ago. Predictions for declining sales in both countries may relate to new or anticipated trade restrictions between them13. High expectations for revenue growth in China may also continue to source from its intent on indigenizing its semiconductor industry and relying less on imports.

In addition, other countries are starting to come on strong. As consumer technology use increases around the world and global technology business hubs spring up in emerging markets, respondents expect to sell more chips in Taiwan, Japan, Korea, India, and Brazil in the near future. With less dependency on two large markets, semiconductor companies will need to broaden their targeting and pursue opportunities in previously untapped regions more aggressively.

Opportunities (continued)

APPLICATION MARKETS 2017 2016

% Mean % Mean

Wireless communications including smartphones and other mobile devices 75% 3.9 84% 4.1

IoT including connected home, smart cities, personal wearables 63% 3.8 56% 3.6

Wireline communications 60% 3.6 56% 3.4

Consumer electronics 59% 3.5 61% 3.5

Industrial 59% 3.5 60% 3.5

Automotive 55% 3.5 65% 3.5

Cloud computing 43% 3.4 27% 3.0

Robotics/Drones 45% 3.2 44% 2.9

Security including biometrics (2017) Biometrics and security (2016) 45% 3.2 48% 3.2

Artificial Intelligence/Cognitive/Deep Learning 43% 3.2 18% 2.9

1=Not at all important and 5=Very important. Partial list shown. Source: KPMG Global Semiconductor Survey 2017

How important are each of the following application markets in driving your company’s semiconductor revenue stream over the next fiscal year? (percentage who selected important/very important on a 1 to 5 scale)

13 Semiconductors face China-US trade restriction risks (Oxford Analytica Daily Brief, May 12, 2017)


Challenges Range of issues keeps execs up at night

Despite the rosy outlook of this year’s survey respondents, there is a lot on their minds. A range of challenges are converging as top-of-mind issues for their businesses, including average selling price (ASP) erosion, keeping pace with diverse customer demands, the high cost of fabrication and back-end equipment, the continuation of Moore’s law and scaling, and production capacity restraints.

ASP erosion remains the biggest issue facing the industry, perhaps due to the view that prices for memory (the segment currently carrying the day) will eventually have to flatten out as more facilities are built to pump out memory, there is an influx of supply, and excess inventory builds up.

Keeping up with diverse customer demands is the second most common industry issue cited (forty-two percent) and made the biggest jump up the list since last year’s survey. This finding is consistent with the emphasis by semiconductor companies to diversify into new sectors, applications, and geographies to seize emerging opportunities outside of traditional sales channels.

Cross-border regulation was a new response option in this year’s question and it debuted strong with 23% of respondents naming it as one of the biggest issues facing the industry in the next three years. This is not surprising given the global nature of the supply chain and the evolving landscape of trade deals and tax reform.

The phenomenon of “increasing R&D costs” has dropped from the number one issue just two years ago to seventh

0 10 20 30 40 50 60 70 80

2015

2016

2017

Increasing R&D costs

Cross border regulation*

Productioncapacity constraints

Continuation ofMoore’s law and scaling

High cost for Faband Backend equipment

Keeping pacewith diverse

customer demands

ASP erosion49%

63%

29%

32%

36%

23%

30%

43%

35%

41%

27%

41%

23%

28%

50%

45%

31%

15%

42%

40%

*Not asked in 2016/2015 Multiple responses allowedSource: KPMG Global Semiconductor Survey 2017

What do you see as the biggest issues facing the semiconductor industry during the next three years?

201720162015

in this year’s survey, as other challenges have become more important to respondents. It is also possible that the record sales growth in 2017 allayed this particular concern in this year’s survey, but this response dropped in the 2016 survey as well. Maybe the aggregate infusion of zero-based budgeting, D&A, Agile methodologies, and other techniques to make R&D more efficient have reached the point of sufficiently mitigating this issue in many respondent’s eyes.


Creating next-generation R&DWith semiconductor R&D costs rising, there is no time to waste in evolving the R&D process. Incorporating D&A and Agile methodologies into the R&D process can yield better ROI, bring focus to future markets, and become a competitive advantage. We recommend four immediate actions:

1 assess your current product development methodologies and your data sources and uses;

2 determine the essential data points within the product development process; and

3 Build an adaptable platform for data analysis; and

4 establish a baseline of performance. Read our complete insights in Evolving the D&A of semiconductor R&D.11

Seizing the daySummaryThe semiconductor industry appears to be in an expansion phase with significant runway in front of it. Revenue projections for 2018 are healthy. The majority of survey respondents say their company will increase R&D and capital investment next year. Very few respondents predict their workforce will contract.

The top strategic priorities (diversification, M&A, and talent management) remain consistent, although to a lesser degree than last year. Implementing disruptive technology and minimizing cyber security risk understandably climbed in the rankings this year. Conversely, the external-focused greater speed to market and the internal-focused articulating vision/culture/purpose and diversity/inclusion categories surprisingly ranked much lower than last year.

A variety of new applications including IoT, automotive, AI, cloud, and robotics/drones are rising in importance and

Next stepsWe believe there are several important topics that semiconductor leaders need to pay attention to in 2018:

Product and system security. As chips are used in a growing amount of connected devices that represent entry points into a network, cyber security is imperative. This mandate only increases as certain technologies such as autonomous vehicles and medical robots move closer to reality. Cyber security needs to be ahead of the bad actors and a priority from the initial design stages.

R&D efficiency. Diverse customer demands and emerging technologies are straining R&D organizations and budgets. Only half of our survey respondents said their R&D spending was efficiently aligned with market opportunities. Companies must be disciplined in identifying and pursuing the most profitable product portfolios. Incorporating D&A and Agile methodologies are ways to improve R&D efficiency.

Culture. Companies must remain vigilant as they continue to integrate operations and cultures from all the M&A over the last few years. And even if integration is not currently occurring, a diverse, integrity-oriented, and inclusive corporate culture must be constantly communicated and nurtured. This is required for all technology companies in today’s environment and is just smart business. It also impacts the ability to retain and manage talent, which is a top strategic priority.

1

2

3

demanding increasingly complex semiconductor products. While this is good for growth, it is also challenging companies to become more disciplined in how they:

• Spend their R&D dollars

• Target companies (semiconductor or adjacent technologies) for acquisition

• Design security into their products and systems

ASP erosion is still seen as the top industry issue for the next three years but by a slimmer margin than last year. Keeping pace with diverse customer demands jumped to number two this year, and we speculate it will remain highly ranked for the foreseeable future. Also of note is that cross-border regulation debuted on the issues list this year.


Evolving the D&A of semiconductor R&D

Semiconductor CFOs, strategy, and corporate development professionals should incorporate D&A and Agile methodology into the R&D process. This can yield better ROI, bring more profitable products to market faster, and become a competitive advantage.

The right to win in semiconductors

In the face of rising costs, semiconductor companies must focus their R&D investment more efficiently. By consistently differentiating its products and demonstrating market leadership, a company earns the “right to win” in the industry.

I see. I think. I drive. (I learn)

An advanced form of artificial intelligence, deep learning is accelerating to the point of transforming the development of self-driving cars. It is steering an exciting new course for the automotive industry. There are risks. There are threats. There are unknowns.

The clockspeed dilemma of the automotive CFO

Soon, auto company revenue will result more from service around cars (mobility-as-a-service), which demands an entirely different business model. CFOs have a critical role to play in overseeing this transformation and ensuring the future of their companies.

Related insights


https://home.kpmg.com/us/en/home/insights/2017/12/evolving-the-da-of-semiconductor-rd.html

https://home.kpmg.com/content/dam/kpmg/pdf/2016/06/kpmg-semiconductor-rd-efficiency-2016-web.pdf

https://institutes.kpmg.us/content/dam/kpmg-im/automotive/isee-ithink-idrive-ilearn.pdf

https://institutes.kpmg.us/content/dam/kpmg/manufacturing-institute/pdf/2017/clockspeed-dilemma-for-auto-cfo-web.pdf

KPMG Global Semiconductor practice

Technology now touches virtually every aspect of our daily lives. The semiconductor industry is poised to capitalize on the digitized and connected world—if they make the right bets to manage unexpected disruptions and capture emerging opportunities. KPMG’s Global Semiconductor practice is here to help semiconductor companies navigate this new world and come out ahead. Our international network of professionals work side-by-side with semiconductor clients of all sizes to look beyond today’s pressing business challenges and anticipate the strategic choices that will best position them for both short- and long-term success.

This is the thirteenth edition of KPMG’s annual Global Semiconductor Survey, which identifies current and emerging trends and issues affecting the world’s semiconductor companies and provides an index reflecting industry leaders’ expectations about revenue, profitability, workforce growth, spending, and other factors. In the fourth quarter of 2017, Forbes Insights, on behalf of KPMG, conducted a Web-based survey of one hundred-fifty senior executives from global semiconductor companies. Respondents from the United States comprised fifty-one percent of the survey. China respondents accounted for fifteen percent, and the rest of Asia Pacific twenty-four percent. Europe and other countries comprised ten percent.

Executive sentiment is reflective of industry leaders as eighty-three percent of survey respondents were from companies with $1 billion or more annual revenue. Companies with less than $1 billion annual revenue accounted for seventeen percent of respondents. The source data for all graphs in this report is the 2017 Global Semiconductor Survey. Select results from prior survey years are also included. The percentages in some charts may not sum to one hundred percent due to rounding.

We would like to acknowledge the contribution of the following individuals who assisted in the development of this publication:

Laura Bubeck, Manager, Content Creation, KPMG LLP (U.S.)

Hasan Dajani, Associate Director, Primary Research, KPMG LLP (U.S.)

Charles Garbowski, Director, Primary Research, KPMG LLP (U.S.)

Robert Rosta, Associate Director, Marketing, KPMG LLP (U.S.)

Contributors

About the researchHow KPMG can help


Member firm contacts Member firm contactsAmericas

Anuj Madan Canada [email protected]

Timothy Zanni United States of America [email protected]

Lincoln Clark United States of America [email protected]

Chris Gentle United States of America [email protected]

Scott Jones United States of America [email protected]

Europe

Marie Guillemot France [email protected]

Peter Heidkamp Germany [email protected]

Stephen Van den Biggelaar Netherlands [email protected]

Han Van Delden Netherlands [email protected]

Tudor Aw United Kingdom [email protected]

Asia Pacific

Kristina Kipper Australia [email protected]

Philip Ng China [email protected]

Richard Y. Sun China [email protected]

Eiichi Fujita Japan [email protected]

Hiroto Kaneko Japan [email protected]

Keita Yamane Japan [email protected]

Juvanus Tjandra Singapore [email protected]

Seung-Yeoul Yang Korea [email protected]

Seung-Hun (Steve) Yeom Korea [email protected]

Samuel Au Taiwan [email protected]


Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

© 2018 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. NDPPS 742185

kpmg.com/socialmedia

https://home.kpmg.com/us/en/home/social.html

https://home.kpmg.com/us/en/home/social.html

https://www.linkedin.com/company/kpmg

https://www.facebook.com/KPMGUS/

https://www.youtube.com/user/KPMGMediaChannel

https://www.youtube.com/user/KPMGMediaChannel

https://twitter.com/KPMG_US

https://plus.google.com/+KPMGUSA/posts

https://www.instagram.com/kpmgus/?hl=en

Electric performance in 2017 powers tempered optimism · 2020-04-22 · Robotics/drones 9. Security...

Documents

Transcript of Electric performance in 2017 powers tempered optimism · 2020-04-22 · Robotics/drones 9. Security...